The fund management industry has been under attack recently over charges. There’s nothing wrong with that – as an industry we should be able to answer any accusations levelled against us. What is wrong, however, is the way in which the campaign against the industry has been built up around a series of myths that have been lapped up by the media.
The fund industry has the answers but the old adage rings true, never let truth get in the way of a good story.
I would like to take this opportunity to separate the facts from the myths:
1. Fund managers conceal the cost of trading.
No, they do not. Trading costs are published in a fund’s annual report and accounts by law. European regulators have carefully considered what should be disclosed as part of fund charges and they are very clear as to why trading costs have to be considered separately.
Whether this is enough or whether more could be done is another issue. The point is that they are not hidden.
2. Trading costs are too high and managers ’over-trade’ as a consequence.
The first point about this is that a fund manager trades in an attempt to increase the value of the investor’s portfolio. Second, the fund manager receives no financial benefit from trading. More important, any positive benefit from trading goes straight to the investor.
Successful trading improves investment return. For my management fee I expect the fund manager to trade each time he sees an opportunity.
3. Trading costs eat into investors’ returns.
No market can be accessed for free so trading costs will always be a reality. Recent IMA research proves that net performance shows the difference between the market return and the investor return is broadly the same as the total expense ratio.
It can be misleading to look at trading costs without understanding the difference they have made to the value of your investment. We will be publishing more on this shortly.
4. You are better off avoiding funds.
Not so. Fund investors benefit from pooling their money with each other so it works out a lot cheaper than DIY investing.
If you invested £10,000 directly in all the companies of the FTSE 100 it would cost you about £1,250 to buy the shares from a broker. Funds are likely to charge about £10 for the same trades and offer a much cheaper way of accessing those shares.
There have been a lot of big numbers bandied around, some of which have been calculated in a dubious manner, all of which are being used to paint the industry in a bad light.
As a leading IFA recently commented, the debate is focusing on the wrong thing. Surely, the number that matters to the individual investor is the net performance.
Mona Patel is head of communications at the Investment Management Association